Book on imbalances in global economy

Richard Duncan, the author of "The Dollar Crisis: Causes, Consequences and Cures", has worked as a financial analyst in Asia for more than 16 years, conducting research and publishing investment reports on companies, industries, and economies from India to Korea.

At the height of the Asian crisis, he worked as a consultant for the International Monetary Fund in Thailand. Subsequently, he joined the World Bank in Washington, DC as a financial sector specialist focusing on issues related to the economic crisis in Asia.

Excerpts:

In your book you are holding a huge US current account deficit responsible for the dollarisation of the world economy. What is your explanation for the crisis greenback is going through at this moment ?

The US current account deficit has reached $500 billion, meaning a deficit of $1 million per minute amounting to 2% of world GDP. And this is the amount at which the US is subsidising the world. The other countries are flooded with US dollar which is leading to a liquidity explosion in those countries. Which in turn is leading to a credit explosion, and eventually to the asset price bubble. And remember, thats why the Imperial Garden is more valuable than California.

How do you see the external situation as far as the Indian economy is concerned, particularly in the context of a burgeoning forex reserve? Do you think this could be the beginning of another bubble?

India today is in an interesting situation. However, we are not yet sure whether it is the initial stage of another bubble. Indian banks are experiencing huge capital gains in the government bond portfolios due to falling interest rates. They should pay back their non-performing loans and clean up their balance sheets.

RBI doesn't want the rupee to appreciate much and hence keeps buying dollars that leads to a rise in domestic money supply. RBI invests the dollar reserves in the US debt papers. But there is a limit to how long it will continue.

The current account deficit of the US stands at 5% of GDP. By the end of this year, the US government's deficit may reach a whopping $6 trn.

In a complex global economic environment, the effectiveness of monetary policy as an instrument to propel growth seems to be losing its relevance as has been experienced in case of Japan. Do you favour a fiscal policy ?

The governments are bankrupt to use fiscal stimulus for growth. Take the case of Japan. The government debt is 140% of GDP. And Keynesian fiscal stimulus is simply not possible. So, both monetary and fiscal policy have lost their relevance in the present set-up. The crisis is a crisis of excess liquidity.

How to give a leg-up to the developing economies?

The policymakers should concentrate on stimulating domestic demand. Also the workers engaged in manufacturing for exports and the industrial sector should be granted more wages.